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Changes in VC + Building Startup Ecosystems
1. Changes in Venture Capital +
Building Startup Ecosystems
@DaveMcClure - 500 Startups
Seoul, Korea - March 2014
2. This Talk
⢠What is 500 Startups?
⢠Changes in Tech + VC
⢠âLean VCâ: Quantitative Venture Capital
⢠Building Startup Ecosystems
⢠Global Entrepreneurship
⢠Q&A
!2
3. Dave McClureâ¨
Founding Partner & Chief Troublemaker, 500 Startups
00âs & 10âs:
⢠VC: Founders Fund, Facebook fbFund, 500 Startups
⢠Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid
⢠Marketing: PayPal, Simply Hired, Mint.com, oDesk, OâReilly
!
80âs & 90âs:
⢠Entrepreneur: Aslan Computing (acqâd by Servinet/Panurgy)
⢠Developer: Windows / SQL DB consultant (Intel, MSFT)
⢠Engineer: Johns Hopkinsâ88, BS Eng / Applied Math
4. 500 Startupsâ¨
Global Seed Fund & Startup Accelerator
⢠What is 500 Startups?
â $100M silicon valley venture capital fund
â internet seed fund + startup accelerator program
â 30 team members (13 investing partners)
â SV, SF, NYC, MEX, BRZ, IND, CHN, SE Asia
â 1000+ Founders / 200+ Mentors
â Community + Content + Conferences
!
⢠700+ Portfolio Coâs / 40+ Countries
â Wildfire (acq GOOG, $350M)
â MakerBot (acq SSYS, $400M)
â Viki (acq Rakuten, $200M)
â Simple (acq BBVA, $117M)
â Twilio
â SendGrid
â Credit Karma
â Udemy
â Zozi
â ElaCarte
â Virool
5. 500 Startups: Global Seed Fundâ¨
Over 200+ startups outside US, in 40+ countries
6. This Talk
⢠What is 500 Startups?
⢠Changes in Tech + Venture Capital
!6
12. Startup Failure: Good or Bad?
⢠Series A bar higher:
⢠$1M revenue, 1M active users, 10M downloads, 100% YoY growth
⢠Lots of Incubation / Seed startups will âFAILâ
!
⢠BUT: Fail Budget = $50-$500K, not $5M+
⢠Many âfailedâ startups = ramen-profitable, small acquisition
⢠⌠*or* MBA alternative (<$100K)
⢠Series A/B VCs have LOTS to choose from (not bad)
!
⢠Overall, founders / market getting smarter
⢠More focus on customers, problems, revenue
⢠Many die, some survive (1-5x), some thrive (20x+).
13. Industry Changes, Challenges
⢠SW Startup Efficiency, Reduced CapX Costs
⢠Growing Market, Growing Platforms
⢠VC Industry Upheavals (2000, 2008)
⢠Micro VC: Seed Funds (ex: First Round Capital)
⢠Incubators & Accelerators (ex: Y Combinator)
⢠Big VC (ex: A16Z) & Platforms (ex: Angel List)
18. The Lean VC:â¨
Lots of Little Bets, Incremental Investment
Method: Invest in lots of startups using incremental
investment, iterative development. Start with
many small experiments, filter out failures, and
expand investment in successes⌠(Rinse & Repeat).
!
⢠Incubator: $0-100K (âBuild & Validate Productâ)
⢠Seed: $100K-$1M (âTest & Grow Marketing Channelsââ)
⢠Venture: $1M-$10M (âMaximize Growth & Revenueâ)
19. Investment Stage #1: â¨
Product Validation + Customer Usage
⢠Structure
â 1-3 founders
â $25-$100K investment
â Incubator environment: multiple peers, mentors/advisors
!
⢠Test Functional Prototype / âMinimum Viable Productâ (MVP):
â Prototype->Alpha, ~3-6 months
â Develop Minimal Critical Feature Set => Get to âIt Works! Someone Uses It.â
â Improve Design & Usability, Setup Conversion Metrics
â Test Small-Scale Customer Adoption (10-1000 users)
!
⢠Demonstrate Concept, Reduce Product Risk, Test Functional Use
⢠Develop Metrics & Filter for Possible Future Investment
20. Investment Stage #2: â¨
Market Validation + Revenue Testing
⢠Structure
â 2-10 person team
â $100K-$1M investment
â Syndicate of Angel Investors / Small VC Funds
!
⢠Improve Product, Expand Customers, Test Revenue:
â
â
â
â
Alpha->Beta, ~6-12 months
Scale Customer Adoption => âMany People Use It, & They Pay.â
Test Marketing Campaigns, Customer Acquisition Channels + Cost
Test Revenue Generation, Find Profitable Customer Segments
!
⢠Prove Solution/Benefit, Assess Market Size
⢠Test Channel Cost, Revenue Opportunity
⢠Determine Org Structure, Key Hires
21. Investment Stage #3: â¨
Revenue Validation + Growth
⢠Structure
â 5-25 person team
â $1M-$10M investment
â Seed & Venture Investors
!
⢠Make Money (or Go Big), Get to Sustainability:
â
â
â
â
â
Beta->Production, 12-24 months
Revenue / Growth => âWe Can Make (a lot of) Money!â
Mktg Plan => Predictable Channels / Campaigns + Budget
Scalability & Infrastructure, Customer Service & Operations
Connect with Distribution Partners, Expand Growth
!
⢠Prove/Expand Market, Operationalize Business
⢠Future Milestones: Profitable/Sustainable, Exit Options
22. Lots of Little Bets
aka âMoneyBall for Startupsâ
â˘
â˘
VC Evolution: Physician, Scale Thyself (Aug 2012)
MoneyBall for Startups, 500 Startups Investment Thesis (Jul 2010)
23. This Talk
⢠What is 500 Startups?
⢠Changes in Tech + VC
⢠âLean VCâ: Quantitative Venture Capital
⢠Building Startup Ecosystems
!23
28. Follow-On Strategy
⢠Should we follow-on? Why or Why Not?
⢠Signaling Risk vs Portfolio Returns
⢠Downstream Investor Syndicate is critical
⢠Using Angel List to drive visibility
⢠Global Strategies (more capital, connections)
29. Feedback Loop & Metrics
⢠Bad decisions = obvious quickly
⢠Good decisions = not obvious for years
⢠Short-term metrics: revenue, users, next
round
!
⢠Sharing best practices for decisions
⢠Lots of Little Bets helps speed up learning
⢠Billion Dollar âUnicornsâ vs 10-20X ROI
30. Scaling VC
⢠Lots of Little Bets? Or a Few Big Bets?
⢠Power Laws, Singles vs Home Runs
⢠Focus on Network Effects
⢠Communication Platforms
⢠Portfolio Size vs Investment Stage
⢠Recruiting Thousands of VCs
31. How Big is Seed Stage Startup Market?
5,000 microVCs can fund 100,000 startups/yr @ $500K/startup = $50B/yr
Q: How many people are entrepreneurs? How many startups get started every year?
⢠~1% of Humanity is âEntrepreneurialâ (defân: âcan create a $10M rev/yr businessâ)
⢠1% x 7B ppl = 70M entrepreneurs, who create 1-5 businesses lifetime (75 yrs)
⢠entrepreneurs could create ~1-5M new startup businesses every year
!
Q: How much capital is needed globally to fund seed stage startups?
⢠Assume 1M-5M startups/yr x $50K-$1M funding/each
⢠Low: 1M x $50K = $50B/yr <-> High: 5M x $1M = $5T/yr
!
Q: How many metros? How many investors? How many investors / startups / metro?
⢠1 âmicro-VCâ can fund 10-20 startups/yr * $50K-$1M = ~$1-10M annual budget
⢠500+ global metros with population >1M+ people can generate ~100-1,000 startups / yr
⢠guesstimate = min 100K+ startups/yr total across top 100-200 global metros
⢠5-50 VCs / metro * 200 metros = 1,000-10,000 VCs globally
⢠FUTURE: 5,000 VCs can deploy $10M/yr each, or $50B/yr in ~100,000 startups
!31
32. This Talk
⢠What is 500 Startups?
⢠Changes in Tech + Venture Capital
⢠Growing 500 + âThe Lean VCâ
⢠GLOBAL Entrepreneurship
!32
34. Local vs Global?
⢠âSilicon Valley is Uniqueâ â NOT TRUE.
⢠*we had a 50-70 year head start⌠ROW will catch up.
⢠Emerging / Developing Markets: 3-5B+
⢠English, Chinese, Spanish, Arabic
!
⢠Challenges: Payments, Mobile/Web, Logistics
⢠Challenges: Capital, Mentorship, Exits
!
⢠Investor Ecosystems, Mentorship & Community
⢠Does the Future look different? (yes, we hope)
35. Global Trends
⢠Growth of Global Languages (see Gengo.com)
â 1B+ speakers: Mandarin, English
â 300-500M+ spkrs: Spanish, Arabic, Hindi, Malay
⢠Smart Device Proliferation
â mobile, tablet, TV, console, etc
⢠More Young, More Old Users Online
⢠More Bandwidth, More Video, More Social, More Mobile
⢠Wealthy International Travelers
⢠Acceleration of Global Payment, E-Commerce
⢠Dramatically Reduced Cost: Product Dev, Customer Acqstn
⢠Global Distribution Platforms (Search, Social, Mobile, Video, Comm)
36. Questions? Comments? Heckles?
⢠Thanks for Listening
⢠Feedback Appreciated
⢠We are Hiring + Internships
!
⢠More Info?
â http://500.co (our company)
â http://500hats.com (my blog)
â https://angel.co/500startups (our fund)
â Dave McClure, @DaveMcClure